PIEDMONT OFFICE REALTY TRUST, INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto ofPiedmont Office Realty Trust, Inc. ("Piedmont," "we," "our," or "us"). See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I, as well as the consolidated financial statements and accompanying notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Given our low-leverage operating model of long-term leases targeted toward creditworthy tenants, the COVID-19 pandemic has not materially impacted our financial condition, overall liquidity position and outlook, or caused material impairments in our portfolio of operating properties; however, the pandemic-related slowdown of leasing activity during 2020 and the first half of 2021 has moderated earnings growth and negatively impacted our occupancy levels and rental rate growth. The pandemic has had an ongoing impact on a few of our small, primarily retail, tenants and the long-term repercussions on our tenant's operations, future leasing decisions, and the global economy remains unclear.
Liquidity and Capital Resources
We intend to use cash on hand, cash flows generated from the operation of our properties, net proceeds from the disposition of select properties, and proceeds from our$500 Million Unsecured 2018 Line of Credit as our primary sources of immediate liquidity. We have$202 million of capacity on our$500 million line of credit available as of the date of this filing. When necessary, we may seek other new secured or unsecured borrowings from third party lenders or issue securities as additional sources of capital. The nature and timing of these additional sources of capital will be highly dependent on market conditions. Our most consistent use of capital has historically been, and we believe will continue to be, to fund capital expenditures for our existing portfolio of properties. During the nine months endedSeptember 30, 2021 and 2020 we incurred the following types of capital expenditures (in thousands): Nine Months EndedSeptember 30 ,September 30, 2021 2020 Capital expenditures for redevelopment/renovations $
36,382
Other capital expenditures, including building and tenant improvements
47,095 52,545
Total capital expenditures (1) $
83,477
(1)Of the total amounts paid, approximately$4.5 million and$1.1 million relates to soft costs such as capitalized interest, payroll, and general and administrative expenses for the nine months endedSeptember 30, 2021 and 2020, respectively. "Capital expenditures for redevelopment/renovations" during both the nine months endedSeptember 30, 2021 and 2020 related to building upgrades, primarily to the lobbies and the addition of tenant amenities at our60 Broad Street building inNew York City ; our200 South Orange Avenue building inOrlando, Florida ; our Galleria buildings inAtlanta, Georgia ; and our25 Burlington Mall Road building inBoston, Massachusetts .
"Other capital expenditures, including building and tenant improvements" includes all other capital expenditures during the period and is typically comprised of tenant and building improvements necessary to lease, maintain, or provide enhancements to our existing portfolio of office properties.
Given that our operating model frequently results in leases for large blocks of space to creditworthy tenants, our leasing success can result in capital outlays which can vary significantly from one reporting period to another based upon the specific leases executed. For leases executed during the nine months endedSeptember 30, 2021 , we committed to spend approximately$3.95 per square foot per year of lease term for tenant improvement allowances and lease commissions (net of expired lease commitments) as compared to$5.90 (net of expired lease commitments) for the nine months endedSeptember 30, 2020 . As ofSeptember 30, 2021 , we had one individually significant unrecorded tenant allowance commitment outstanding of approximately$21.8 million related to theState of New York's lease at our60 Broad Street building. In addition to the amounts that we have already committed to as a part of executed leases, we also anticipate continuing to incur similar market-based tenant improvement allowances and leasing commissions in conjunction with procuring future leases for our existing portfolio of properties. Both the timing and magnitude of expenditures related to future leasing activity can vary due to a number of factors and are highly dependent on the competitive market conditions of the particular office market at the time a lease is being negotiated. 23
--------------------------------------------------------------------------------
Table of Contents
There are other uses of capital that may arise as part of our typical operations. Subject to the identification and availability of attractive investment opportunities and our ability to consummate such acquisitions on satisfactory terms, acquiring new assets consistent with our investment strategy could also be a significant use of capital. We may also use capital resources to repurchase additional shares of our common stock under our stock repurchase program when we believe the stock is trading disparately from our peers and at a significant discount to net asset value. As ofSeptember 30, 2021 , we had approximately$169.3 million of board-authorized capacity remaining for future stock repurchases. Finally, with no other immediate maturities, we currently plan to renew our revolving line of credit in 2022. We may also use capital to repay other debt obligations when we deem it prudent to refinance various obligations. The amount and form of payment (cash or stock issuance) of future dividends to be paid to our stockholders will continue to be largely dependent upon (i) the amount of cash generated from our operating activities; (ii) our expectations of future cash flows; (iii) our determination of near-term cash needs for debt repayments, development projects, and selective acquisitions of new properties; (iv) the timing of significant expenditures for tenant improvements, leasing commissions, building redevelopment projects, and general property capital improvements; (v) long-term dividend payout ratios for comparable companies; (vi) our ability to continue to access additional sources of capital, including potential sales of our properties; and (vii) the amount required to be distributed to maintain our status as a REIT. With the fluctuating nature of cash flows and expenditures, we may periodically borrow funds on a short-term basis to cover timing differences in cash receipts and cash disbursements.
Results of Operations
Overview
Net income applicable to common stockholders for the three months endedSeptember 30, 2021 was$11.3 million , or$0.09 per diluted share, as compared with net income applicable to common stockholders of$8.9 million , or$0.07 per diluted share, for the three months endedSeptember 30, 2020 . The increase recognized during the current quarter is primarily attributable to rising rental rates, decreased operating expenses, particularly related to our landlord's portion of real estate taxes, as well as the expiration of operating expense recovery abatements on certain leases. These improvements were partially offset by a 0.9% reduction in our overall leased percentage on a year-to-date basis as a result of reduced new leasing activity in 2020 and the first half of 2021 due to the COVID-19 pandemic. 24 -------------------------------------------------------------------------------- Table of Contents Comparison of the three months endedSeptember 30, 2021 versus the three months endedSeptember 30, 2020
Income from Continuing Operations
The following table sets forth selected data from our consolidated statements of income for the three months endedSeptember 30, 2021 and 2020, respectively, as well as each balance as a percentage of total revenues for the same periods presented (dollars in millions): September 30, September 30, 2021 % of Revenues 2020 % of Revenues Variance Revenue: Rental and tenant reimbursement revenue$ 127.4 $ 128.3 $
(0.9)
Property management fee revenue 0.6 0.7
(0.1)
Other property related income 3.0 2.7 0.3
Total revenues 131.0 100 % 131.7 100 % (0.7)
Expense:
Property operating costs 51.8 40 % 53.3 41 % (1.5)
Depreciation 30.5 23 % 28.3 21 % 2.2
Amortization 20.4 16 % 23.0 17 % (2.6)
General and administrative 6.9 5 % 5.5 4 % 1.4
109.6 110.1 (0.5)
Other income (expense):
Interest expense (12.4) 9 % (12.7) 10 % 0.3
Other income 2.3 2 % 0.3 - % 2.0
Loss on sale of real estate assets - - % (0.3) - % 0.3
Net income $ 11.3 9 % $ 8.9 7 % $ 2.4
Revenue
Rental and tenant reimbursement revenue decreased approximately $0.9 million for
the three months ended September 30, 2021 , as compared to the same period in the
prior year, primarily reflecting the impacts of lower overall occupancy due to
slow leasing activity in 2020 and the first half of 2021 due to the COVID-19
pandemic and disposition activity that occurred during 2020, partially offset by
the growth in rental rates and higher reimbursement income on certain large
leases in 2021 due to the expiration of operating expense abatements.
Other property related income increased approximately $0.3 million for the three
months ended September 30, 2021 as compared to the same period in the prior year
primarily due an increase in transient parking utilization at our buildings
which was lower during 2020 as a result of the COVID-19 pandemic.
Expense
Property operating costs decreased approximately
Depreciation expense increased approximately$2.2 million for the three months endedSeptember 30, 2021 as compared to the same period in the prior year. Approximately$4.4 million of the increase was due to depreciation on additional building and tenant improvements placed in service subsequent toJuly 1, 2020 at our existing properties. This increase was partially offset by disposition activity subsequent toJuly 1, 2020 , as well as the cessation of depreciation on the225 and 235 Presidential Way assets as a result of classifying these assets as held for sale inMay 2021 . Amortization expense decreased approximately$2.6 million for the three months endedSeptember 30, 2021 as compared to the same period in the prior year. The decrease is primarily due to certain lease intangible assets at our existing properties becoming fully amortized subsequent toJuly 1, 2020 .
General and administrative expense increased approximately
25
--------------------------------------------------------------------------------
Table of Contents
compared to the same period in the prior year, primarily reflecting reduced
accruals for potential performance based compensation during the three months
ended September 30, 2020 as a result of the COVID-19 pandemic.
Other Income (Expense)
Interest expense decreased approximately$0.3 million for the three months endedSeptember 30, 2021 as compared to the same period in the prior year primarily as a result of the repayment of a$35 million mortgage using funding from our lower-rate revolving line of credit inJune 2021 . Other income increased approximately$2.0 million for the three months endedSeptember 30, 2021 as compared to the same period in the prior year. The variance is attributable to interest income recognized on notes receivable due from the purchaser of our New Jersey Portfolio inOctober 2020 . The notes receivable mature inOctober 2023 and are secured by the twoBridgewater Crossing properties, sold in 2020. Loss on sale of real estate assets during the three months endedSeptember 30, 2020 represents a true-up adjustment to the significant gain recognized on the sale of the1901 Market Street building during the second quarter of 2020. 26 -------------------------------------------------------------------------------- Table of Contents Results of Operations
Comparison of the nine months ended
The following table sets forth selected data from our consolidated statements of income for the nine months endedSeptember 30, 2021 and 2020, respectively, as well as each balance as a percentage of total revenues for the same period presented (dollars in millions): September 30, September 30, 2021 % of Revenues 2020 % of Revenues Variance Revenue: Rental and tenant reimbursement revenue$ 380.3 $ 391.7 $
(11.4)
Property management fee revenue 1.9 2.1
(0.2)
Other property related income 8.3 9.7 (1.4)
Total revenues 390.5 100 % 403.5 100 % (13.0)
Expense:
Property operating costs 154.8 40 % 159.6 40 % (4.8)
Depreciation 88.6 23 % 83.3 21 % 5.3
Amortization 64.0 16 % 71.0 17 % (7.0)
General and administrative 22.4 6 % 20.1 5 % 2.3
329.8 334.0 (4.2)
Other income (expense):
Interest expense (37.4) 9 % (41.9) 10 % 4.5
Other income 7.3 2 % 0.8 - % 6.5
Loss on early extinguishment of debt - - % (9.3) 2 % 9.3
Gain on sale of real estate assets - - % 191.0 47 % (191.0) Net income $ 30.6 8 %$ 210.1 52 %$ (179.5) Revenue Rental and tenant reimbursement revenue decreased approximately$11.4 million for the nine months endedSeptember 30, 2021 as compared to the same period in the prior year, primarily reflecting lower overall occupancy in 2021 and the impact of net disposition activity that occurred during 2020, partially offset by higher reimbursement income due to the expiration of operating expense abatements on certain large leases in 2021. Other property related income decreased approximately$1.4 million for the nine months endedSeptember 30, 2021 as compared to the same period in the prior year primarily due to lower transient parking utilization at our buildings as result of the COVID-19 pandemic. Expense Property operating costs decreased approximately$4.8 million for the nine months endedSeptember 30, 2021 as compared to the same period in the prior year. The variance was primarily due to net disposition activity that occurred during 2020 as well as lower real estate taxes in certain jurisdictions and lower operating expenses such as janitorial and utilities due to lower tenant utilization at the properties in 2021 due to the COVID-19 pandemic. Depreciation expense increased approximately$5.3 million for the nine months endedSeptember 30, 2021 as compared to the same period in the prior year. The increase was primarily due to additional building and tenant improvements placed in service subsequent toJanuary 1, 2020 , partially offset by a net decrease in depreciation associated with net disposition activity subsequent toJanuary 1, 2020 , as well as the cessation of depreciation on the225 and 235 Presidential Way assets as a result of classifying these assets as held for sale inMay 2021 . Amortization expense decreased approximately$7.0 million for the nine months endedSeptember 30, 2021 as compared to the same period in the prior year. Amortization expense decreased primarily due to certain lease intangible assets at our existing properties becoming fully amortized subsequent toJanuary 1, 2020 . 27 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses increased approximately$2.3 million for the nine months endedSeptember 30, 2021 as compared to the same period in the prior year, primarily reflecting reduced accruals during the nine months endedSeptember 30, 2020 for potential performance based compensation tied to the sharp decline in leasing activity and stock performance as a result of the COVID-19 pandemic.
Other Income (Expense)
Interest expense decreased approximately$4.5 million for the nine months endedSeptember 30, 2021 as compared to the same period in the prior year primarily as a result of the repayment of a$160 million mortgage in conjunction with the sale of the1901 Market Street building inJune 2020 . An increase in capitalized interest for redevelopment projects at60 Broad Street ,200 South Orange Avenue ,25 Burlington Mall Road , and Galleria Atlanta during the nine months endedSeptember 30, 2021 also contributed to the decrease in interest expense.
Other income increased approximately
The loss on early extinguishment of debt during the nine months endedSeptember 30, 2020 of approximately$9.3 million was associated with the early repayment of the $160Million Fixed-Rate Loan which was collateralized by the1901 Market Street building. The property was sold during the nine months endedSeptember 30, 2020 . The loss, which modestly reduces the significant gain on sale, was comprised of a prepayment penalty and unamortized debt issuance costs and discounts associated with the loan. Gain on sale of real estate assets during the nine months endedSeptember 30, 2020 includes a gain of approximately$191.0 million recognized on the sale of the1901 Market Street building. 28 -------------------------------------------------------------------------------- Table of Contents Issuer and Guarantor Financial Information Piedmont, through its wholly-owned subsidiaryPiedmont Operating Partnership, LP ("Piedmont OP" or the "Issuer"), has issued senior unsecured notes payable of$350 million that mature in 2023,$400 million that mature in 2024, and two separate issuances of$300 million , that mature in 2030 and 2032, respectively, (collectively, the "Notes"). The Notes are senior unsecured obligations of Piedmont OP and rank equally in right of payment with all of Piedmont OP's other existing and future senior unsecured indebtedness and would be effectively subordinated in right of payment to any of Piedmont OP's future mortgage or other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future indebtedness and other liabilities of Piedmont OP's subsidiaries, whether secured or unsecured. The Notes are fully and unconditionally guaranteed byPiedmont Office Realty Trust, Inc. (the "Guarantor"), the parent entity that consolidates Piedmont OP and all other subsidiaries. By execution of the guarantee, the Guarantor guarantees to each holder of the Notes that the principal and interest on the Notes will be paid in full when due, whether at the maturity dates of the respective loans, or upon acceleration, upon redemption, or otherwise, and interest on overdue principal and interest on any overdue interest, if any, on the Notes and all other obligations of the Issuer to the holders of the Notes will be promptly paid in full. The Guarantor's guarantee of the Notes is its senior unsecured obligation and ranks equally in right of payment with all of the Guarantor's other existing and future senior unsecured indebtedness and guarantees. The Guarantor's guarantee of the Notes is effectively subordinated in right of payment to any future mortgage or other secured indebtedness or secured guarantees of the Guarantor (to the extent of the value of the collateral securing such indebtedness and guarantees); and all existing and future indebtedness and other liabilities, whether secured or unsecured, of the Guarantor's subsidiaries. In the event of the bankruptcy, liquidation, reorganization or other winding up of Piedmont OP or the Guarantor, assets that secure any of their respective secured indebtedness and other secured obligations will be available to pay their respective obligations under the Notes or the guarantee, as applicable, and their other respective unsecured indebtedness and other unsecured obligations only after all of their respective indebtedness and other obligations secured by those assets have been repaid in full.
The non-Guarantors are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes, or to make any funds available therefore, whether by dividends, loans, distributions or other payments.
Pursuant to Rule 13-01 of Regulation S-X, Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, the following tables present summarized financial information for Piedmont OP asIssuer andPiedmont Office Realty Trust, Inc. as Guarantor on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor and (ii) equity in earnings from and investments in any subsidiary that is a non-Guarantor (in thousands): Combined Balances of Piedmont OP and Piedmont Office As of As of
December 31, 2020
Due from non-guarantor subsidiary $ 900 $ 810
Total assets $ 357,339 $ 347,757
Total liabilities $ 1,703,606 $ 1,654,009
For the Nine Months
Ended September 30,
2021
Total revenues $ 35,329
Net loss $ (33,086)
29
--------------------------------------------------------------------------------
Table of Contents
Net Operating Income by Geographic Segment
Our President and Chief Executive Officer has been identified as our chief
operating decision maker ("CODM"), as defined by GAAP. Our CODM evaluates
Piedmont's portfolio and assesses the ongoing operations and performance of its
properties utilizing the following geographic segments: Dallas , Atlanta ,
Washington, D.C. , Minneapolis , Boston , Orlando , and New York . These operating
segments are also our reportable segments. As of September 30, 2021 , we also
owned two properties in Houston and one property in Chicago that do not meet the
definition of an operating or reportable segment as the CODM does not regularly
review these properties for purposes of allocating resources or assessing
performance. Further, we do not maintain a significant presence or anticipate
further investment in these markets. These three properties are included in
"Corporate and other" below. See Note 11 to the accompanying consolidated
financial statements for additional information and a reconciliation of Net
income applicable to Piedmont to accrual-based net operating income ("NOI").
The following table presents NOI by geographic segment (in thousands):
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Dallas $ 16,246 $ 15,549 $ 50,267 $ 43,936
Atlanta 15,127 15,309 44,725 45,243
Boston 12,058 10,575 33,829 31,825
Washington, D.C. 9,802 10,043 27,460 29,479
Minneapolis 8,089 8,632 24,556 25,397
Orlando 7,656 7,867 25,743 24,839
New York 7,502 8,582 22,636 31,040
Total reportable segments 76,480 76,557 229,216 231,759
Corporate and other 2,731 1,636 6,436 11,654
Total NOI $ 79,211 $ 78,193 $ 235,652 $ 243,413
Comparison of the Nine Months Ended
Dallas
NOI increased primarily as a result of the purchase of the
NOI decreased primarily due to the sale of the New Jersey Portfolio in
Corporate and other
NOI decreased primarily as a result of the sale of
Funds From Operations ("FFO"), Core Funds From Operations ("Core FFO"), and Adjusted Funds From Operations ("AFFO")
Net income calculated in accordance with GAAP is the starting point for
calculating FFO, Core FFO, and AFFO. These metrics are non-GAAP financial
measures and should not be viewed as an alternative measurement of our operating
performance to net income. Management believes that accounting for real estate
assets in accordance with GAAP implicitly assumes that the value of real estate
assets diminishes predictably over time. Since real estate values have
historically risen or fallen with market conditions, many industry investors and
analysts have considered the presentation of operating results for real estate
companies that use historical cost accounting alone to be insufficient. As a
result, we believe that the additive use of FFO, Core FFO, and AFFO, together
with the required GAAP presentation, provides a more complete understanding of
our performance relative to our competitors and a more informed and appropriate
basis on which to make decisions involving operating, financing, and investing
activities.
30
--------------------------------------------------------------------------------
Table of Contents
We calculate FFO in accordance with the current National Association of Real
Estate Investment Trusts ("NAREIT") definition. NAREIT currently defines FFO as
Net income (calculated in accordance with GAAP), excluding depreciation and
amortization related to real estate, gains and losses from the sale of certain
real estate assets, gains and losses from change in control, and impairment
write-downs of certain real estate assets and investment in entities when the
impairment is directly attributable to decreases in the value of depreciable
real estate held by the entity. Other REITs may not define FFO in accordance
with the NAREIT definition, or may interpret the current NAREIT definition
differently than we do; therefore, our computation of FFO may not be comparable
to the computation made by other REITs.
We calculate Core FFO by starting with FFO, as defined by NAREIT, and adjusting
for gains or losses on the extinguishment of swaps and/or debt and any
significant non-recurring or infrequent items. Core FFO is a non-GAAP financial
measure and should not be viewed as an alternative to net income calculated in
accordance with GAAP as a measurement of our operating performance. We believe
that Core FFO is helpful to investors as a supplemental performance measure
because it excludes the effects of certain infrequent or non-recurring items
which can create significant earnings volatility, but which do not directly
relate to our core recurring business operations. As a result, we believe that
Core FFO can help facilitate comparisons of operating performance between
periods and provides a more meaningful predictor of future earnings potential.
Other REITs may not define Core FFO in the same manner as us; therefore, our
computation of Core FFO may not be comparable to the computation made by other
REITs.
We calculate AFFO by starting with Core FFO and adjusting for non-incremental
capital expenditures and non-cash items including: non-real estate depreciation,
straight-lined rent and fair value lease adjustments, non-cash components of
interest expense and compensation expense. AFFO is a non-GAAP financial measure
and should not be viewed as an alternative to net income calculated in
accordance with GAAP as a measurement of our operating performance. We believe
that AFFO is helpful to investors as a meaningful supplemental comparative
performance measure of our ability to make incremental capital investments in
new properties or enhancements to existing properties that improve revenue
growth potential. Other REITs may not define AFFO in the same manner as us;
therefore, our computation of AFFO may not be comparable to the computation of
other REITs.
31
--------------------------------------------------------------------------------
Table of Contents
Reconciliations of net income to FFO, Core FFO, and AFFO are presented below (in
thousands except per share amounts):
Three Months Ended Nine Months Ended
September 30, Per September 30, Per September 30, Per September 30, Per
2021 Share(1) 2020 Share(1) 2021 Share(1) 2020 Share(1)
GAAP net income applicable to common
stock $ 11,306 $ 0.09
30,336 0.25 27,960 0.22 87,873 0.71 82,384 0.65
Amortization of lease-related costs 20,362 0.16 22,976 0.18 63,943 0.51 70,930 0.56
Loss/(gain) on sale of real estate
assets - - 340 0.01 - - (191,032) (1.51)
NAREIT Funds From Operations
applicable to common stock $ 62,004 $ 0.50 $ 60,219 $ 0.48 $ 182,413 $ 1.47 $ 172,361 $ 1.36
Adjustments:
Loss on early extinguishment of debt - - - - - - 9,336 0.08
Core Funds From Operations
applicable to common stock $ 62,004 $ 0.50 $ 60,219 $ 0.48 $ 182,413 $ 1.47 $ 181,697 $ 1.44
Adjustments:
Amortization of debt issuance costs,
fair market value adjustments on
notes payable, and discounts on debt 849 931 2,076 2,180
Depreciation of non real estate
assets 216 286 762 930
Straight-line effects of lease
revenue (2,122) (6,315) (8,627) (20,378)
Stock-based compensation adjustments 1,637 1,336 5,152 4,281
Net effect of amortization of above
and below-market in-place lease
intangibles (2,731) (3,240) (8,192) (9,517)
Non-incremental capital
expenditures (2) (18,640) (15,611) (52,849) (58,062)
Adjusted Funds From Operations
applicable to common stock $ 41,213 $ 37,606 $ 120,735 $ 101,131
Weighted-average shares outstanding
- diluted 124,627 126,385 124,472 126,302
(1)Based on weighted average shares outstanding - diluted.
(2)We define non-incremental capital expenditures as capital expenditures of a
recurring nature related to tenant improvements, leasing commissions, and
building capital that do not incrementally enhance the underlying assets' income
generating capacity. Tenant improvements, leasing commissions, building capital
and deferred lease incentives incurred to lease space that was vacant at
acquisition, leasing costs for spaces vacant for greater than one year, leasing
costs for spaces at newly acquired properties for which in-place leases expire
shortly after acquisition, improvements associated with the expansion of a
building, and renovations that either enhance the rental rates of a building or
change the property's underlying classification, such as from a Class B to a
Class A property, are excluded from this measure. Non-incremental capital
expenditures incurred during the nine months ended September 30, 2020 includes a
$16 million leasing commission for the approximately 20-year,
520,000-square-foot renewal and expansion of the State of New York's lease at
our 60 Broad Street building in New York City that was executed during the
fourth quarter of 2019.
32
--------------------------------------------------------------------------------
Table of Contents
Property and Same Store Net Operating Income
Property Net Operating Income ("Property NOI") is a non-GAAP measure which we
use to assess our operating results. We calculate Property NOI beginning with
Net income (calculated in accordance with GAAP) before interest, income-related
federal, state, and local taxes, depreciation and amortization and removing any
impairment losses, gains or losses from sales of property and other significant
infrequent items that create volatility within our earnings and make it
difficult to determine the earnings generated by our core ongoing business.
Furthermore, we remove general and administrative expenses, income associated
with property management performed by us for other organizations, and other
income or expense items such as interest income from loan investments or costs
from the pursuit of non-consummated transactions. For Property NOI (cash basis),
the effects of straight-lined rents and fair value lease revenue are also
eliminated; while such effects are not adjusted in calculating Property NOI
(accrual basis). Property NOI is a non-GAAP financial measure and should not be
viewed as an alternative to net income calculated in accordance with GAAP as a
measurement of our operating performance. We believe that Property NOI, on
either a cash or accrual basis, is helpful to investors as a supplemental
comparative performance measure of income generated by our properties alone
without our administrative overhead. Other REITs may not define Property NOI in
the same manner as we do; therefore, our computation of Property NOI may not be
comparable to that of other REITs.
We calculate Same Store Net Operating Income ("Same Store NOI") as Property NOI
attributable to the properties (excluding undeveloped land parcels) that were
(i) owned by us during the entire span of the current and prior year reporting
periods; (ii) that were not being developed or redeveloped during those periods;
and (iii) for which no operating expenses were capitalized during those periods.
For Same Store NOI (cash basis), the effects of straight-lined rents and fair
value lease revenue are also eliminated. Same Store NOI, on either a cash or
accrual basis, is a non-GAAP financial measure and should not be viewed as an
alternative to net income calculated in accordance with GAAP as a measurement of
our operating performance. We believe that Same Store NOI is helpful to
investors as a supplemental comparative performance measure of the income
generated from the same group of properties from one period to the next. Other
REITs may not define Same Store NOI in the same manner as we do; therefore, our
computation of Same Store NOI may not be comparable to that of other REITs.
33--------------------------------------------------------------------------------
Table of Contents
The following table sets forth a reconciliation from net income calculated in accordance with GAAP to EBITDAre, Core EBITDA, Property NOI, and Same Store NOI, on both a cash and accrual basis, for the three months endedSeptember 30, 2021 and 2020, respectively (in thousands): Cash Basis Accrual Basis Three Months Ended Three Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020
Net income applicable to Piedmont (GAAP basis)
8,943
Net loss applicable to noncontrolling interest (5) (3) (5) (3) Interest expense 12,450 12,725 12,450 12,725 Depreciation 30,552 28,247 30,552 28,247 Amortization 20,362 22,976 20,362 22,976 Depreciation and amortization attributable to noncontrolling interests 21 22 21 22 Loss on sale of real estate assets - 340 - 340 EBITDAre(1) and Core EBITDA(2)$ 74,686 $
73,250
6,955 5,469 6,955 5,469
Management fee revenue (3) (309) (422) (309) (422)
Other income (2,121) (104) (2,121) (104)
Non-cash general reserve for uncollectible
accounts - (33)
Straight-line rent effects of lease revenue (2,122)
(6,315)
Straight line effects of lease revenue attributable to noncontrolling interests 1
(5)
Amortization of lease-related intangibles (2,731) (3,240) Property NOI$ 74,359 $ 68,600 $ 79,211 $ 78,193 Net operating income from: Acquisitions (4) (8,012) (6,041) (9,621) (8,505) Dispositions (5) (359) (3,338) (359) (3,191) Other investments (6) 254 150 311 (286) Same Store NOI$ 66,242 $ 59,371 $ 69,542 $ 66,211 Change period over period in Same Store NOI 11.6 % N/A 5.0 % N/A (1)We calculate Earnings Before Interest, Taxes, Depreciation, andAmortization- Real Estate ("EBITDAre") in accordance with the current NAREIT definition. NAREIT currently defines EBITDAre as net income (computed in accordance with GAAP) adjusted for gains or losses from sales of property, impairment losses, depreciation on real estate assets, amortization on real estate assets, interest expense and taxes, along with the same adjustments for joint ventures. Some of the adjustments mentioned can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates. EBITDAre is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that EBITDAre is helpful to investors as a supplemental performance measure because it provides a metric for understanding our results from ongoing operations without taking into account the effects of non-cash expenses (such as depreciation and amortization) and capitalization and capital structure expenses (such as interest expense and taxes). We also believe that EBITDAre can help facilitate comparisons of operating performance between periods and with other REITs. However, other REITs may not define EBITDAre in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than us; therefore, our computation of EBITDAre may not be comparable to that of such other REITs. (2)We calculate Core Earnings Before Interest, Taxes, Depreciation, and Amortization ("Core EBITDA") as net income (computed in accordance with GAAP) before interest, taxes, depreciation and amortization and incrementally removing any impairment losses, 34 -------------------------------------------------------------------------------- Table of Contents gains or losses from sales of property and other significant infrequent items that create volatility within our earnings and make it difficult to determine the earnings generated by our core ongoing business. Core EBITDA is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that Core EBITDA is helpful to investors as a supplemental performance measure because it provides a metric for understanding the performance of our results from ongoing operations without taking into account the effects of non-cash expenses (such as depreciation and amortization), as well as items that are not part of normal day-to-day operations of our business. Other REITs may not define Core EBITDA in the same manner as us; therefore, our computation of Core EBITDA may not be comparable to that of other REITs. (3)Presented net of related operating expenses incurred to earn such management fee revenue. (4)Acquisitions consist of theDallas Galleria Office Towers inDallas, Texas , purchased onFebruary 12, 2020 . (5)Dispositions consist of1901 Market Street inPhiladelphia, Pennsylvania , sold onJune 25, 2020 , and theNew Jersey property portfolio sold onOctober 28, 2020 . (6)Other investments include active out-of-service redevelopment and development projects, land, and recently completed redevelopment and development projects. The operating results from222 South Orange Avenue inOrlando, Florida , are included in this line item. 35 -------------------------------------------------------------------------------- Table of Contents The following table sets forth a reconciliation of net income calculated in accordance with GAAP to EBITDAre, Core EBITDA, Property NOI, and Same Store NOI, on both a cash and accrual basis, for the nine months endedSeptember 30, 2021 and 2020 (in thousands): Cash Basis Accrual Basis Nine Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020
Net income applicable to Piedmont (GAAP basis)
210,079
Net loss applicable to noncontrolling interest (9) (2) (9) (2) Interest expense 37,375 41,942 37,375 41,942 Depreciation 88,635 83,315 88,635 83,315 Amortization 63,943 70,930 63,943 70,930 Depreciation and amortization attributable to noncontrolling interests 63 64 63 64 Gain on sale of real estate assets - (191,032) - (191,032) EBITDAre(1)$ 220,604 $
215,296
- 9,336 - 9,336
Core EBITDA(2) $ 220,604 $
224,632
22,417 20,049 22,417 20,049
Management fee revenue (3) (946) (1,098) (946) (1,098)
Other income (6,423) (170) (6,423) (170)
Non-cash general reserve for uncollectible
accounts 412 4,831
Straight-line rent effects of lease revenue (8,627)
(20,378)
Straight line effects of lease revenue attributable to noncontrolling interests 2
(12)
Amortization of lease-related intangibles (8,192) (9,517) Property NOI$ 219,247 $ 218,337 $ 235,652 $ 243,413 Net operating (income)/loss from: Acquisitions (4) (24,214) (15,320) (29,244) (21,246) Dispositions (5) (204) (20,225) (204) (21,330) Other investments (6) 580 388 748 551 Same Store NOI$ 195,409 $ 183,180 $ 206,952 $ 201,388 Change period over period in Same Store NOI 6.7 % N/A 2.8 % N/A 36
--------------------------------------------------------------------------------
Table of Contents
(1)We calculate EBITDAre in accordance with the current NAREIT definition. NAREIT currently defines EBITDAre as net income (computed in accordance with GAAP) adjusted for gains or losses from sales of property, impairment losses, depreciation on real estate assets, amortization on real estate assets, interest expense and taxes, along with the same adjustments for joint ventures. Some of the adjustments mentioned can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates. EBITDAre is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that EBITDAre is helpful to investors as a supplemental performance measure because it provides a metric for understanding our results from ongoing operations without taking into account the effects of non-cash expenses (such as depreciation and amortization) and capitalization and capital structure expenses (such as interest expense and taxes). We also believe that EBITDAre can help facilitate comparisons of operating performance between periods and with other REITs. However, other REITs may not define EBITDAre in accordance with the NAREIT definition, or may interpret the current NAREIT definition differently than us; therefore, our computation of EBITDAre may not be comparable to that of such other REITs. (2)We calculate Core EBITDA as net income (computed in accordance with GAAP) before interest, taxes, depreciation and amortization and incrementally removing any impairment losses, gains or losses from sales of property and other significant infrequent items that create volatility within our earnings and make it difficult to determine the earnings generated by our core ongoing business. Core EBITDA is a non-GAAP financial measure and should not be viewed as an alternative to net income calculated in accordance with GAAP as a measurement of our operating performance. We believe that Core EBITDA is helpful to investors as a supplemental performance measure because it provides a metric for understanding the performance of our results from ongoing operations without taking into account the effects of non-cash expenses (such as depreciation and amortization), as well as items that are not part of normal day-to-day operations of our business. Other REITs may not define Core EBITDA in the same manner as us; therefore, our computation of Core EBITDA may not be comparable to that of other REITs. (3)Presented net of related operating expenses incurred to earn such management fee revenue. (4)Acquisitions consist of theDallas Galleria Office Towers inDallas, Texas , purchased onFebruary 12, 2020 . (5)Dispositions consist of1901 Market Street inPhiladelphia, Pennsylvania , sold onJune 25, 2020 , and theNew Jersey property portfolio sold onOctober 28, 2020 . (6)Other investments include active out-of-service redevelopment and development projects, land, and recently completed redevelopment and development projects. The operating results from222 South Orange Avenue inOrlando, Florida , are included in this line item.
Overview
Our portfolio is a geographically diverse group of properties concentrated primarily in select sub-markets within seven majorEastern U.S. office markets, with a majority of our Annualized Lease Revenue ("ALR") being generated from the Sunbelt. We typically lease space to large, creditworthy corporate or governmental tenants on a long-term basis. As ofSeptember 30, 2021 , our average lease is approximately 15,000 square feet with six years of lease term remaining. Consequently, leased percentage, as well as rent roll ups and roll downs, which we experience as a result of re-leasing, can fluctuate widely between buildings and between tenants, depending on when a particular lease is scheduled to commence or expire.
Leased Percentage
Our portfolio was 85.9% leased as ofSeptember 30, 2021 , as compared to approximately 86.8% leased as ofDecember 31, 2020 . As ofSeptember 30, 2021 , we had only one lease greater than 1% of our ALR that is scheduled to expire prior toDecember 31, 2022 . This lease at our750 West John Carpenter Freeway asset (assigned to theDallas geographic reportable segment) represents 1.2% of our ALR, and is scheduled to expire during the fourth quarter of 2022. As the economy has continued to recover from the impacts of the COVID-19 pandemic, leasing activity across our portfolio has improved; however, to the extent new leases for currently vacant space outweigh or fall short of scheduled expirations, such leases would increase or decrease our overall leased percentage, respectively.
Impact of Downtime, Abatement Periods, and Rental Rate Changes
Commencement of new leases typically occurs 6-18 months after the lease execution date, after refurbishment of the space is completed. The downtime between a lease expiration and the new lease's commencement can negatively impact Property NOI and Same Store NOI comparisons (both accrual and cash basis). In addition, office leases, both new and renewal, often contain upfront rental and/or operating expense abatement periods which delay the cash flow benefits of the lease even after the new lease or renewal has commenced and negatively impact Property NOI and Same Store NOI on a cash basis until such abatements expire. As ofSeptember 30, 2021 , we had approximately 770,000 square feet of executed leases for vacant space yet to commence or under rental abatement. 37 -------------------------------------------------------------------------------- Table of Contents If we are unable to replace expiring leases with new or renewal leases at rental rates equal to or greater than the expiring rates, rental rate roll downs could occur and negatively impact Property NOI and Same Store NOI comparisons. As mentioned above, our geographically diverse portfolio and the magnitude of some of our tenant's leased space can result in rent roll ups and roll downs that can fluctuate widely on a building-by-building and a quarter-to-quarter basis. During the three months endedSeptember 30, 2021 , we experienced a 16.1% and 10.5% roll up in accrual and cash rents, respectively, on executed leases related to space vacant one year or less. During the nine months endedSeptember 30, 2021 , we experienced a 17.0% and 8.2% roll up in accrual and cash rents, respectively, on executed leases related to space vacant one year or less. Same Store NOI increased by 11.6% and 5.0% on a cash and accrual basis, respectively, for the three months endedSeptember 30, 2021 and increased 6.7% and 2.8% on a cash and accrual basis, respectively, for the nine months endedSeptember 30, 2021 . The primary drivers of the increases in both metrics for both periods included rising rental rates, decreased operating expenses, particularly related to our landlord's portion of real estate taxes, as well as the expiration of abatements at certain properties, offset by lower overall occupancy. Property NOI and Same Store NOI comparisons for any given period fluctuate as a result of the mix of net leasing activity in individual properties during the respective period.
Election as a REIT
We have elected to be taxed as a REIT under the Code and have operated as such beginning with our taxable year endedDecember 31, 1998 . To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted REIT taxable income, computed without regard to the dividends-paid deduction and by excluding net capital gains attributable to our stockholders, as defined by the Code. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we may be subject to federal income taxes on our taxable income for that year and for the four years following the year during which qualification is lost and/or penalties, unless theIRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT and intend to continue to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes. We have elected to treat one of our wholly-owned subsidiaries as a taxable REIT subsidiary. This subsidiary performs non-customary services for tenants of buildings that we own and real estate and non-real estate related-services; however, any earnings related to such services performed by our taxable REIT subsidiary are subject to federal and state income taxes. In addition, for us to continue to qualify as a REIT, our investments in taxable REIT subsidiaries cannot exceed 20% of the value of our total assets.
Inflation
We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax, and insurance reimbursements on a per square-foot basis, or in some cases, annual reimbursement of operating expenses above certain per square-foot allowances. However, due to the long-term nature of the leases, the leases may not readjust their reimbursement rates frequently enough to fully cover inflation.
Off-Balance Sheet Arrangements
We are not dependent on off-balance sheet financing arrangements for liquidity.
As of
Application of Critical Accounting Policies
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgement in the application of accounting policies, including making estimates and assumptions. These judgements affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgement or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion of our critical accounting policies. There have been no material changes to these policies during the nine months endedSeptember 30, 2021 . 38
--------------------------------------------------------------------------------
Table of Contents
Contractual Obligations We have had significant changes to our debt structure during the nine months ended September 30, 2021 as detailed in Note 3 to our accompanying consolidated financial statements. As such, our contractual obligations related to long-term debt as ofSeptember 30, 2021 were as follows (in thousands): Payments Due by Period Less than More than Contractual Obligations(1) Total 1 year 1-3 years 3-5 years 5 years Long-term debt (2)$ 1,678,000 $ 78,000 $ 750,000 $ 250,000 $ 600,000
(1)Contractual obligations do not include amounts committed for tenant or capital improvements under leases where Piedmont is the lessor. However, see
Note 6 to our accompanying consolidated financial statements for details concerning our individually material lease commitments, the timing of which may fluctuate. Additionally, Piedmont does not have any ground leases, nor does Piedmont have any material obligations as lessee under operating lease agreements as ofSeptember 30, 2021 . (2)Amounts include principal payments only and balances outstanding as ofSeptember 30, 2021 , not including approximately$12.9 million of net unamortized issuance discounts and debt issuance costs paid to lenders. We made interest payments, including payments under our interest rate swaps, of approximately$41.5 million during the nine months endedSeptember 30, 2021 , and expect to pay interest in future periods on outstanding debt obligations based on the rates and terms disclosed herein and in Note 3 to our accompanying consolidated financial statements. Commitments and Contingencies We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 6 to our consolidated financial statements for further explanation. Examples of such commitments and contingencies include: •Commitments Under Existing Lease Agreements; •Contingencies Related to Tenant Audits/Disputes; and •Contingencies Related to the COVID-19 Pandemic.
© Edgar Online, source
